A blog about Politics, Economics, and assorted random things I find interesting

12/19/2017

Recently an online interlocutor made the point to me that a "flat" tax is regressive rather than fair because minimum living expenses are largely fixed, thus creating a "proportionally" higher tax rate on those of lower income.

In the course of countering his attempted argument, I realized that the definition of "flat" and "progressive" have been shifted one echelon over, creating a distortion of terms in favor of the preferred Marxist/Progressive position.

A truly flat tax resembles a fee. If the government spends $2B on a new aircraft carrier and there are 400 million taxpayers, then a "flat" tax-- a uniform distribution of tax burden-- would simply divide that $2B among the 400M taxpayers and we'd each get a $50 bill to pay from Uncle Sam.

The ingenuity in the verbal gymnastics is in describing the rate as "flat." But the rate is not the tax. It is the first derivative, the rate of change.

A brief physics analogy illustrates this point. If you are traveling at a "flat" rate of speed, then your position is still changing, perhaps at a rate of 55 miles per hour. Likewise, if you are accelerating at a "flat" rate of 200 miles per hour per hour, your speed is changing and you will likely crash or get a ticket if you sustain that.

The key point here is this: tax BURDEN is the tax, not the tax RATE. The obvious corollary follows immediately behind: any taxation scheme in which some pay more than others is in fact progressive.

It may be progressive with respect to income-- those who earn more pay more. It might be progressive with respect to wealth-- like a property tax-- in that those with more taxable wealth pay more tax. Regardless of the basis for the progressivity, it is still "progressive" in taxation.

A proportional tax of a fixed 15% or 20% then isn't "flat" in tax, only in rate. As a tax, it is progressive. Returning to our car example, the flat rate of speed was still producing a change in position (predictable over time).

When we add a progressive rate, then the system becomes doubly progressive, like the way a change in position is affected by a "fixed" rate of acceleration. It's like taxing your income squared or income cubed by some fixed rate. The resulting distribution follows an exponential function and is progressively progressive.

This is why a so-called "flat" income tax is progressive, not regressive.

10/20/2017

I won't bother to try and inventory the list of the things Senator Sanders (I-VT) doesn't understand; that list is too lengthy for a blog posting. But I wanted to highlight a fatal flaw in Bernie Sander's Tax-The-Rich philosophy.

What Bernie (and apparently most of his supporters) doesn't understand is that applying a super high tax rate to the top bracket doesn't actually raise more money to the government. The following chart shows the correlation of the top marginal rate for each year since WW2 and the amount of revenue the federal government took in as a percentage of GDP.

Notice that when the top marginal tax rate is in the low 30% range, the actual revenue to the government varies from below 15% of GDP to is high as 20.5% of GDP. And when you crank up the top marginal tax rate to 90%, the range of variation is about the same, with as little as the low 15% range to as high as about 20.5%.

The regression line comparing revenue to top tax rate is nearly flat. In other words, the revenue to the government seems almost entirely unresponsive to the actual top marginal tax rate.

Taxing the rich simply doesn't bring in more money to the government. Government revenue is almost entirely independent of the top marginal tax rate.

Since the pie doesn't get any bigger, does taxing the rich change how the pie is sliced? We'll examine that next.

08/30/2017

Tax reform momentarily enjoys a bit of airplay, so let's talk about what tax reform should look like.

We first establish a baseline of clarity: the tax burden consists solely of the total cost in time and money of paying it. Period. It is not the rate. It is not the presence or absence of a credit or deduction. These latter items influence the tax burden, but they do not define it. As a local ad humorously intones: "In business, time is money; but money is also money."

Therefore, the only way to cut taxes meaningfully is to either collect less money or allow that money to be paid more easily, perhaps by taking less time and effort to comply with with tax law.

There are very, very few politicians on the Right or Left that actually want the government to collect less revenue. Republicans like to pretend that "cutting taxes" is a magic elixir of economic growth, so they think they can have their cake and eat it too-- cut taxes without cutting revenue. But we've already established this is a fallacy because revenue is taxation. By definition, you can only cut the financial burden of taxation by reducing gov't revenue.

The difference between Republican and Democrat positions on taxation is one of means, not ends. Both parties always want Uncle Sam to be flush with cash, the better to buy votes with and show how incredibly generous they are with confiscated funds.

The goals of tax reform should be:

1) Making the tax burden far less progressive

2) Making the tax code far simpler and less costly to comply with.

Why less progressive? A progressively higher rate makes avoidance more lucrative at you go up. And of course, those at the top have money shelters and other resources less accessible to those lower down the income scale. Thus, when you try to tax the higher income earner at ever higher rates, you make it far more worthwhile for them to avoid those taxes even as they have the resources to do so. The result is that the real burden paid by the rich-- i.e., the total dollars collected from them-- goes DOWN, not up.

There is so much evidence to support this phenomenon that I won't bother recounting it all here. Suffice it to say, the it was noted as far back as the 1920s by Andrew Mellon when he complained that tax-free bonds where being used by the rich to avoid paying taxes when the income tax rate went up. (revenue went down). And of course, the UK eliminated its 50% top tax bracket when they found that the amount of money subject to that rate dried up sufficiently to cause a loss of revenue. And after the 'Bush tax cuts for the rich' were enacted, the tax burden of the top 1% went up and did so throughout his Presidency.

Search "Taxation" on the topic at right for more on this.

Reason number one, then for making the tax code less progressive is that it actually collects more revenue from the rich. Reason number two concerns incentives as well. Progressive taxation undermines the marginal utility of work. The harder a person works, the less valuable it becomes. It unduly harms the poor as well by keeping them poor.

The best example of this phenomenon is that the bottom end of the income ladder-- a welfare case. Let's say a person can collect welfare for $200 per week or he could work for $300 a week. The effective tax rate to our potential worker is actually 66%! Why? Because he must give up $200 to earn $300. The value of the job-- his net benefit-- is therefore just $100 a week. And this is less than his $200 a week from welfare. One can hardly blame him for staying home when he'd take a pay cut to go to work. And of course, the more lucrative welfare or unemployment benefits become, the more perverse the incentives become.

Make no mistake, this is a product of the progressivity alone. If the welfare benefit is only $50 and the work still $300, then his effective "tax" for giving up welfare is only 16.7% Without welfare, the "tax" of giving it up is zero.

Progressivity in our tax code encourages the rich to game the system (with resources more than able to the task) while punishing the poor and keeping them captive in the income bracket.

The other key tax reform needed is simplicity. Stop treating taxpayers differently based on what they bought or sold, saved or spent, did or didn't. Don't make someone pay more tax because they aren't disabled, or they don't have kids, or they rent an apartment instead of have a mortgage.

Level the playing field. Instead of picking winners and losers and to who will or wont' pay more tax, just level the field. The absurdity in our tax code comes not from the nominal rates, it comes form the myriad of deductions and credits that make the rates meaningless. Someone in the "15% bracket" can end up with an effective tax rate of -30%. In other words, they are net beneficiaries because the tax code is their welfare code as well.

Let taxes be taxes and welfare be welfare. Commingling them distorts the picture and prevents honest assessment. Which is likely the entire point. Our disastrous tax is not an accident or a mystery. It is a deliberate effort to punish few and reward many so a politician can buy votes.

03/01/2017

I used to think that the government should tax things uniformly to avoid distortions in the market. This was my economic-libertarian side, and I strongly prefer consumption taxes to taxes on income or property. I oppose property taxes on the grounds they undermine property rights. I oppose income taxes because they also undermine property rights by asserting a right to a person's income.

So when discussions in State politics turned to funding highway improvements and the two proposals were either raising a gas tax or raising a cigarette tax, I opposed both ideas on the ground that they were excise taxes. Excise taxes are taxes on particular items when purchased. They are a form of consumption tax, but narrowly tailored to a particular item.

I was particularly opposed to the cigarette tax because it would be born mostly by poor people. Smokers are lower median income than non-smokers by a significant amount. My thinking was that this particular excise tax would mostly harm the poor and, being an excise tax, introduce some market distortions.

I think a lot about the role of government and its relations to law and economics, because I think it is particularly consequential. Further reflection yielded a new insight: the rule of law gives government the right to allocate societal values, and it is therefore perfectly consistent for those value judgments to be reflected in the tax code.

Right now, the government has "distorted the market" for all kinds of items: illicit drugs, certain kinds of firearms, and a huge array of prohibited activities and items. By Prohibition, the government has done the act that bounds the most extreme end of the government punish/subsidize spectrum. (in a sense; once criminalized, one could say there is another spectrum of severity of criminal punishment and enforcement).

Why can it do this? It does this because we the people have decided there is a compelling state interest in discouraging illicit drug use (for example) and so it is prohibited, and Courts have ruled it is within the Constitutional scope of government to do so.

But I have some reservations. Here are some of the good and bad I see as likely outcomes:

An especially high rate of tobacco taxation is likely to invite a black market in tobacco products from states with lower rates of taxation. Other states with high tobacco taxes have already seen this, and it creates a major enforcement problem trying to determine the tax-origin of a particular cigarette. I don't like laws or policies that are difficult to enforce. All this can be avoided if the rate of taxation is set to a level comparable to neighboring states, such that smuggling or any other form of arbitrage is not cost-effective.

So the tax may fall most heavily on poorer people. Is this a bad thing? Higher cost is often cited as a reason to stop smoking. So one potential upshot is that people might be induced to stop smoking. Or not start. A poor person is likely receiving significant subsidy for medical expenses, so that person being healthier ends up saving taxpayer dollars on medical care. Or so goes the reasoning. This article suggests that common vices should actually be subsidized because people die faster and actually end up costing less to care for. Such is the sickeningly perverse incentives of a welfare state with socialized medicine like the NHS in the UK.

Since taxation yields money, and money is fungible, every dollar raised by one form of taxation is a dollar not needing to be taken from somewhere else. I'd like to think a little Pareto Principle here might be appropriate.

The problem with all excise taxes is that they invite lobbying as taxation and subsidy are the the ways that government picks winners and losers in the market.

So the takeaway is this: I think there is an argument to make for a "sin" tax on the consumption of certain goods that are luxuries or known to have public costs. A flat consumption tax, while facially neutral, ignores the fact that all consumption is NOT neutral in terms of personal and especially public cost.

For example, if local air quality becomes a problem, would it not be appropriate to tax consumption that most directly contributes to poor air quality? I would think so.

After all, even Uncle Miltie supported the idea of a tax if net externalities were truly negative. (which may not even be true for tobacco).

02/05/2016

I believe that many well-meaning conservatives have supported things that actually work against Conservative principles because of ignorance or misunderstanding. Tax policy has many examples of this inconsistency.

Consider tax write-offs for state and local taxes. On one hand, this lowers people’s taxes, which would appear to be a Conservative gesture, right? Don’t conservatives always favor lower taxes?

The problem is that’s it’s not really lowering taxes. What determines the total amount of taxation? Is it not spending that determines total taxation? All money spent by government can only be spent if it is first taken from someone, or borrowed. And when it’s borrowed, that credit worthiness only comes from the promise of future takings from people, or of printing more money. Confiscation and inflation are always the only two sources of federal government funding.

Therefore, the only way to raise or lower all taxes uniformly is to raise or lower spending.

When you talk about raising or lowering any particular tax, you are rather talking about the allocation of confiscations—a distribution of the burden. Who will pay more and who will pay less? It is always relative and zero-sum. If you allow local taxes to be written off, then the amount of someone’s write-off is a function of how much local taxation there is. So that person who lives in a highly populated area with onerous tax burdens will be able to shift his federal tax burden to those who live in area where state and local taxation is low.

This creates a transfer of wealth to high-tax areas from areas that are low-tax, as the burden for federal taxes is shifted towards those with less local tax expenses to deduct.

But if you would listen to the Grover Nordquists of the world, any and all tax reductions are good, so it’s OK to bail out large, costly cities at the expense of lower tax areas—and in the name of ‘conservatism’ no less!

The truth is that what is taxed and how much is just an allocation. You can change the shape of the burden- to whom it falls and in what share, but you can’t change the total burden, which is set by spending and interest rates. It’s like squeezing a water balloon can make take any number of shapes, but the amount of water in the balloon does not change.

Those who narrowly focus on just one tax or deduction are completely missing the point.

02/06/2014

In yet another illustration of how foolhardy are so many government policies, we learn now that there is a vicious wage cap in Obamacare so severe that earning even $1 more than the cutoff could cause a theoretical increase in insurance cost of up to $20,000.

10/28/2013

It's really simple, actually. Simplicity, however is not ease, and the kind of reform I am proposing would not be politically easy. The toughest part is that it would require educating a lot of Americans who may not be very numerate as to how they will benefit. However, the political difficulty I will not address here; this is just a simple illustration intended to outline how the process can be made to work.

The idea is that the Federal government would hold a reverse auction for Social Security benefit buyouts. Uncle Sam would offer lump sums to people in exchange for the following:

Forfeiture of all future Social Security pension benefits

Must continue to pay all FICA taxes as presently

Must hold lump sum amount in a special account (like a Roth IRA), subject to substantial penalties for disallowed distributions.

That's basically it. To control expenses, Uncle Sam could earmark a certain amount of funds that, once exhausted, would terminate the program for that year.

Let's say we start the first year with a modest budget (for Washington, anyway) of $50 million. The Social Security Administration (SSA) could allow those with a certain number of years of work history (perhaps 5+ years of W-2s) to auction off to the government the rights to their SS benefits. Offers will vary from a couple thousand dollars to perhaps hundreds of thousands of dollars.

A young worker who believes that his pension fund won't exist in 40 years might offer an amount like $5000, since the bird in the hand is so much more valuable. That $5000 at age 25 would be over $51k by age 65 at only 6% (and at 10%--the rough average return of the stock market over time—the amount grows to over half a million dollars). However, the future expense to the SSA of that young worker could be hundreds of thousands of dollars. The government is getting a sweetheart deal, selling the benefits for pennies on the dollar. But the buyer is also getting a good deal. He doesn't know if he will live to ever draw his retirement. He's also getting a hard asset he owns (and can pass along), rather than a potentially empty promise from the government.

Other workers of older age would obviously make much higher offers, because they have far less time. But the amount each person may offer is really irrelevant for two reasons. First, we've capped the annual expense (at $50 million in this case) to the government. Secondly, the program is complete optional. No one will be taking advantage of anyone else. The taxpayer bids, and the government chooses to accept or reject based on its estimates of that person's future pension expenses and their future contributions.

The major downfall of this idea is that it provides a means to solve a problem that nobody in Washington apparently cares about: the massive unfunded liability of Social Security.

Still, it would allow each taxpayer to have the chance to receive a small percentage of something rather than 100% of nothing, which seems like a worthwhile trade.

03/01/2013

Most better-informed voters know that educational outcomes in American are following a 30+year downward trend even as funding for the same dwarfs levels of long ago.

The [Milton and Rose] Friedman Institute for School Choice releases the following report that a huge fraction of educational dollars are being used to hire non-teaching administrators, accountants, and coaches.

America’s K-12 public education system has experienced tremendous
historical growth in employment, according to the U.S. Department of
Education’s National Center for Education Statistics. Between fiscal
year (FY) 1950 and FY 2009, the number of K-12 public school students in
the United States increased by 96 percent while the number of full-time
equivalent (FTE) school employees grew 386 percent. Public schools grew
staffing at a rate four times faster than the increase in students over
that time period. Of those personnel, teachers’ numbers increased 252
percent while administrators and other staff experienced growth of 702
percent, more than seven times the increase in students.

In a recent Heritage Foundation Backgrounder, Lindsey Burke (2012)
reports that since 1970, the number of students in American public
schools increased by 8 percent while the number of teachers increased 60
percent and the number of non-teaching personnel increased 138 percent.

That hiring pattern has persisted in more recent years as well. This
report analyzes the rise in public school personnel relative to the
increase in students since FY 1992. Analyses are provided for the nation
as a whole and for each state.

Between FY 1992 and FY 2009, the number of K-12 public school
students nationwide grew 17 percent while the number of full-time
equivalent school employees increased 39 percent, 2.3 times greater than
the increase in students over that 18-year period. Among school
personnel, teachers’ staffing numbers rose 32 percent while
administrators and other staff experienced growth of 46 percent; the
growth in the number of administrators and other staff was 2.7 times
that of students.

Importantly, such growth cannot be attributed to the federal No Child
Left Behind (NCLB) law. During the pre-NCLB period, FY 1992 to FY 2001,
public schools’ student population grew 13 percent while public
education personnel rose 29 percent—a 23 percent increase for teachers
and a 37 percent increase for administrators and other staff. Post-NCLB
(FY 2002 to FY 2009), employment growth (7 percent) still outpaced
student numbers (3 percent). Teachers and administrators increased at
about the same rate of 7 percent.

The chief difference between the NCLB era and the prior time period
is the trend toward increasing non-teaching staff at a rate greater than
teachers was halted—with NCLB, teachers and non-teaching staff both
increased at the same rate (more than twice as fast as student
enrollment). In both the pre- and post-NCLB periods analyzed, overall
staffing in public education grew about 2.3 times faster than the
increase in students.

Compared to other nations’ schools, U.S. public schools devote
significantly higher fractions of their operating budgets to
non-teaching personnel—and lower portions to teachers. Meanwhile, the
U.S. is one of the highest spending nations in the Organisation for
Economic Co-operation and Development (OECD) when it comes to K-12
education.

01/03/2013

The results suggest that the tax take from incomes over £150,000 is little different whether you set the tax rate at 45% or 50%. Setting the rate much higher than 45% is pointless; beyond 50% it is self-defeating.